SP 500 and NDX Futures Daily Charts - The Dell Computer Market

It was rally mode today as traders celebrated the great economy in Europe, which is allowing their banks to pay back the ECB as they get 'healthy.'

Huh? Well, that's what the spokesmodels said. Its a 'better-than-expected' world, at least for the one percent.

This is the Dell Market, with lots of money flowing around the plate, but little value being added, just a further concentration of money and power.

Is that Mr. Megaphone Talking on the SP 500 Futures Chart? Or Yet Another Headfake?

Is that a megaphone top forming up on the SP 500 March futures chart?  Or is the Fed just glad to keep fueling this glorious rally for freedom?

Formations like this are fun to watch as potential indicators, but they really do not work until they 'work.'

That is, they are not active until activated by a clean trend break in one direction or the other.  This is true of all chart formations that represent a possibility that can become more or less probable over time, depending on which way things develop.

Charts don't do anything.  They merely reflect the underlying reality in an easier to grasp representation, for those with that sort of visual inclination.  They are a roadmap, not the road.

Right now 'the market wants to go up,' meaning lots of market participants want it to go up, want to take it up and keep squeezing the bears who piled on ahead of the fiscal cliff and sequestration.

My interpretation of this 'megaphone' is that the market is undecided about the viability of the rally continuing given the impasse in Washington and the impending battle of the budget over sequestration which should happen in about four or five weeks.  And despite the recent happy talk, the European situation remains volatile, and the currency war continues.

If you want to play a formation like this, thenwait for it, and give up bragging rights and save yourself a loss from being 'too early' or just plain wrong.

There is a word for those who bet against the market on the if-come.  They are called 'broke,' and spend most of their time badgering people on chat boards.  They are often wrong, but rarely in doubt.

Why Bears Should Tread Carefully

Enter the Credibility Trap: A Prediction About the S&P Ratings Lawsuit

No, I do not predict that there will be no criminal indictments and convictions to follow the suit, or even serious personal penalties from the civil action beyond something that is tax deductible as a cost of doing business. That is like predicting that a heavy rain will make puddles.

I predict that the primary defense that will be offered by S&P will be based on 'the credibility trap' itself.

The usual defense in cases like this is the First Amendment, that S&P was merely voicing an opinion. In this particular case, after having combed through over 20 million documents, the Department of Justice will attempt to prove that S&P was not merely voicing an opinion, but lying for gain, which is not 'protected speech.'

And most of them obviously cannot use the CEO defense of non-involvement and general ignorance of the entire situation, since they were being paid to write professionally informed judgements based on a factual due diligence.  It would be like a surgeon arguing against malpractice because he was watching porn while performing surgery, and was so distracted he did not really notice what he was doing and was therefore merely a hapless bystander.  Don't laugh.  It seems to be working for MF Global, and several national governments.

Having these usual avenues thwarted, I suggest that S&P will point to all the other credible voices of the economists and politicians, 'very serious people,' who said either absolutely nothing, or voiced similarly misplaced opinions and 'mistakes in judgement' about the true nature of the unfolding financial frauds.  How can you blame us, when no one of consequence said anything differently, forcefully.

So rather than key actors in a massive control fraud, they will portray themselves as hapless victims of the same mass delusion that affected most of the New York-London-Washington establishment, with many top universities in their supporting cast. 

Will Alan Greenspan offer to be an expert witness on the perils of mistakes made while blinded by a sincerely held ideological delusion?  Poor fellow, just a good chap making an honest error in judgement.  He used a bad model.  Who can blame him.

The defense will be 'the credibility trap' itself.  You cannot convict us, without indicting yourself.  

And if they are as I think they are, the S&P team will bring some credible implications of their case for the sacrosanct TBTF crowd to the plea bargaining process, and make its objective the best terms in a settlement while admitting no wrongdoing.   We chose to settle because it was cheaper.  We are victims of big government.   The usual suspects will run with that.

It is a corollary to the credibility trap that no one who knows 'where the bodies are buried' will be personally inconvenienced beyond mere appearances.

It will be interesting to see how this plays out.  It might set the tone for the 'investigations' of the coming collapse and scandal in the paper silver market.   How could we have done anything wrong when the CFTC investigated us for five years, and sat next to our people almost every day?

What Time Is the Next Crisis? - An Historic Warning From John Hussman

"The enemy of the conventional wisdom is not ideas but the march of events."

John Kenneth Galbraith

This is from John Hussman's latest weekly observations which you can read here.

In every instance he cites with which I am familiar, any concerns about the gross mispricing of risk were lightly dismissed, because 'the market says that everything is all right.'   As if the financial markets were some prescient, infallible instrument, and not overtaken by the manipulation of insiders and the monied interests. 

The 'rising market' kept most criticism of the policy errors in the growth of the credit bubble cowed and quiet, until the inevitable market break and crisis. That the financiers have not yet completely destroyed the global economy is not particularly reassuring, while they are still working at inscribing their arrogance, writ large on the pages of history, chapter by dreadful chapter.

Or more cynically one can conclude that yes, things are getting out of control, but we must keep dancing while the music is playing, and say nothing while the money is flowing in order to 'save the system,' while disabling the smoke alarms and stuffing one's pockets.

As long as the Fed can keep printing money and delivering it to the Banks and the one percent, and not to the real economy, through its purchases of their (fraudulently) mispriced financial assets, this could keep going, while maximizing the damage.  While it does give the financial engineers some feeling of control, it really does nothing constructive except to delay the essential reforms.

The combination of constructively applied stimulus and sweeping financial reform was the genius of Roosevelt, and the lack of it is the failure of Obama.

And the big correction might not even show up all that readily, in nominal terms at least, in the equity markets for some time, being papered over by a blizzard of new money.  And so that implies a crash in the bond markets, as we saw a few years after the Great Crash of 1929.  But they are getting better at the cover ups, so who can say.

The tail of financialization and leverage is still 'wagging the dog' of the real economy.   After reading the current thoughts in mainstream economics, and Modern Monetary Theory, it seems quite likely that history is about to deal out another hard lesson in real wealth and value.

I am ambivalent to the exact timing since I cannot know it.    And so if another year passes and 'nothing happens' I may not be cheered by it while the fundamentals like median wage continue to deteriorate.  This is the mechanism in which bubbles develop, and we have seen more of them than most, and with increasingly intensity.

But I am more confident that the punchline to this comedy, if it continues unabated, will be the devaluation of the currency and at least a de facto default on the debt which can take several forms. And the usual yahoos will rise up and seek power, promising an hysterical people to take away their pain, while inflicting it on 'the others.'

"Present market conditions now match 6 other instances in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention). These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history:

1. S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 22.6.
2. S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.
3. Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 54.3% vs. 22.3%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.
4. Yields rising, with the 10-year Treasury yield higher than 6 months earlier.

The blue bars in the chart below identify historical points since 1970 corresponding to these conditions.